MONEY Ask the Expert

Retirement Savings Checkup for the New Year

Q. I save 15% of my salary each year in my 401(k), my company matches another 4.5% and I contribute the max to a Roth IRA. Am I doing enough to safely retire? — Dave K., Jacksonville Beach, Fla.

A. If you continue at the rate you’re saving, it’s hard to imagine you’ll come up short at retirement time. After all, you’re socking away money at more than double the rate of most 401(k) participants, plus you’re funding that Roth IRA.

But as important as diligent saving is, your savings rate alone can’t tell you whether you’re on track for a secure retirement. To know for sure, you’ve got to undertake a more comprehensive review of your retirement planning efforts.

You can do that by performing what I call my annual New Year’s Retirement-Planning Checkup. It consists of just three simple steps:

1. Figure the odds. There are so many unknowns and potential detours along the road to retirement — market setbacks, spates of unemployment, emergencies that drain savings — that you can never say that a secure retirement is a given.

Related: Take control of your spending

But by taking a look at where you stand now as well as the strategy you’re currently employing,you can get an estimate of the probability that you’ll be able to maintain an acceptable standard of living once you retire.

The easiest way to do such an assessment is to go to a robust online tool like our Retirement Planner or T. Rowe Price’s Retirement Income Calculator. You just plug in such information as how much you’ve already got tucked away in retirement accounts, the percentage of salary you’re saving now, how those savings are invested and the age at which you intend to retire, and you’ll get an immediate forecast of your chances of being able to retire on, say, 75% of your pre-retirement salary.

Aside from the obvious benefit of letting you know whether the path you’re on has a decent chance of leading to a comfy post-career life, this sort of evaluation has another advantage: by changing a few variables — your savings rate, how you invest, the age at which you retire, whether you work part-time in retirement — you can see how you might be able to increase your shot at a secure retirement.

This type of exercise is essential if you really want to know whether you’re making progress toward retirement. If you don’t feel confident doing this sort of number crunching on your own, then consider hiring a pro to guide you through the process. Just be sure to vet that adviser carefully.

2. Evaluate your portfolio. Although I’ve long noted that diligent saving is more crucial to retirement success than savvy investing, you nonetheless want to be sure you’re not undermining your savings effort with an inferior investment strategy.

Your first task on the investingfront is to makesure you’ve got a mix of stocks and bonds that’s appropriate given your age and risk tolerance.

Generally, the younger you are, the more of your retirement savings you’ll want to invest in stocks. As retirement nears and preserving your nest egg becomes a bigger priority than growing it, you’ll want to shift more toward bonds. There’s no single stocks-bonds blend that’s right for everyone.

As a starting point, you can check out the mix for a target-date retirement fund designed for someone your age. You can then see how such a blend might actually perform by going to Morningstar’s Asset Allocator tool. If you find that the mix you’re considering is too aggressive or too conservative, you can then adjust it.

You also want to be sure that your respective stock and bond holdings are properly diversified. In the case of stocks, for example, that means owning shares of both large and small companies as well as a broad range of industries. To gauge whether your portfolio is reasonably balanced compared with market benchmarks, plug your holdings into Morningstar’s Portfolio X-Ray tool.

Finally, take a hard look at what you’re shelling out in annual expenses.

Reducing the portion of your return that’s siphoned off by investment costs can have a big payoff. Lowering expenses from, say, 1.5% a year to 0.5% can increase the eventual size of your nest egg by roughly 20%. Fortunately, federal rules that went into effect in August make it much easier for 401(k) participants to see what they’re actually paying in fees and thus home in on the low-cost options in their plan’s investment roster.

3. Schedule updates. Once you’ve completed this checkup, you don’t need to fiddle with your retirement strategy every waking moment. Still, it is a good idea to check in occasionally just to be sure the plan you’ve put in place is working as expected.

So take a moment now to schedule a few specific times during the coming year — the end of a quarter, a birthday, wedding anniversary, whatever — when you can do quick re-assessment of where you stand and make tweaks if needed.

If you experience a significant change in your circumstances — say, moving to a new job or taking on a big new financial commitment — then you may very well want to perform a full-blown review.

Bottom line: There’s no way to eliminate uncertainty when it comes to retirement planning. But if you combine this sort of annual checkup with periodic monitoring throughout the year, you’ll dramatically improve your chances of getting, and staying, on the path to a secure retirement.

MONEY

Reverse Mortgage: Is It Too Risky?

Considering a reverse mortgage to drum up retirement cash? Don't tap your home's equity too hard. photo: adam voorhes

If you’re 62 or older, you’ve probably started getting reverse-mortgage solicitations in the mail, and it’s hard to miss the aging actors singing the loans’ praises on TV (hey, it’s the Fonz!).

The pitch may sound appealing, especially if you’re among the 83% of boomers who plan to stay in their home through retirement: Tap your home’s equity now and receive a monthly payment, line of credit, or lump sum, regardless of your credit score or income.

The mortgage will start accruing interest immediately, but you won’t need to pay back a dime until you move out or die — at which point you or your heirs must repay the bank in full.

Indeed, reverse mortgages can be a good option for seniors age 70 or older who are committed to staying in their homes and don’t have the savings to cover their expenses, says elder-law attorney Janet Colliton of West Chester, Pa.

However, she adds that recent trends are making the loans a riskier proposition. For one, borrowers are younger: Last year 47% were in their sixties, more than double the percentage from 2001. A growing number (69%) are also taking their payout in a lump sum rather than a steady stream. And reports say predatory lenders have been pushing these mortgages on folks who can’t afford them.

The result: Borrowers who take the loan too soon, or spend the payout too quickly, could end up without a source of equity to fall back on — and might even lose their homes.

If you or someone you love is thinking about a reverse mortgage, consider these questions. If you answer yes to even one, this type of loan is probably the wrong option for you.

Are you in your sixties?

You want to put off a reverse mortgage as long as possible. The amount you can borrow is based on the current interest rate (you can borrow more when it’s lower), your home equity, and the age of the younger spouse. The older he or she is, the more you get.

On a $300,000 house with a $100,000 mortgage, for instance, a 75-year-old might receive a $574 monthly payment, while a 65-year-old would get just $411. (See reversemortgage.org for a calculator.)

Related: Your Pension: Lump Sum or Lifetime Payments?

Younger borrowers also face more years of compound interest, which can quickly ratchet up the amount you owe.

There’s also a greater chance that you’ll run into unexpected medical bills or other expenses as you age, sapping your payout more quickly than you anticipated.

Will the costs be more than you can afford?

Reverse mortgages are a notoriously expensive way to tap equity.

For that borrower with the $300,000 home, fees would include $6,000 in upfront mortgage insurance, a $2,500 origination fee, and about $3,400 in traditional closing costs — and that’s before you get to the monthly mortgage insurance premium of 1.25% of the loan balance.

Plus, you’ll still need to cover regular housing expenses such as taxes and maintenance.

Don’t commit to the loan until you’ve met with an independent financial adviser to go over the total cost and discuss alternatives, says Steve Weisman, author of A Guide to Elder Planning.

Is there a better option?

Before turning to a reverse mortgage, homeowners should explore bolstering their finances by downsizing or working longer.

Those with good credit might also consider a traditional refinance or a home-equity line of credit (HELOC), where you draw only the funds you need and pay off interest as you go, says Waterford, Conn., financial planner Nancy Butler.

It’s also a good idea to get your heirs involved — particularly since they’ll be responsible for paying off (or selling your house to pay off) the loan after your death. They may be able to provide a private reverse mortgage or become a part owner of the house now.

Ultimately, people should think very carefully before draining their home equity, says Margot Saunders, counsel at the National Consumer Law Center: “Once it’s gone, it’s gone.”

MONEY

Retirement Investing in Uncertain Times

I’m 37, make $52,000 a year and have just begun putting money into a 401(k). With thirty years until retirement, I’m inclined to believe that a somewhat aggressive investing strategy will pay off in the long run. But given the immediate uncertainty in the economy and the market, am I better off investing in less risky funds in the short term? — Erik, Brooklyn, N.Y.

If you’re waiting for uncertainty, immediate or otherwise, to die down before you embark on your long-term investing strategy, you’re going to have a long wait. Things are never certain in the economy and the market.

Whether it’s concerns about the ability of a new Congress and a second Obama administration to get a handle on our massive budget deficit, worries about the effect Superstorm Sandy might have on future job growth, trepidation over the approaching fiscal cliff or anxiety stemming from the European debt crisis, uncertainty is a constant.

Or, to borrow a phrase from Gilda Radner’s classic Roseanne Roseannadanna character from the early days of Saturday Night Live: “It’s always something — if it ain’t one thing, it’s another.”

So the more important question you should be asking yourself is this: What kind of investor do you want to be, given that you’ll always have to deal with uncertainty? As I see it, you have two choices: you can be a reactive investor or a systematic investor.

Reactive investors spend most of their time figuring how to rejigger their investments to take advantage of new developments on the investing scene or to prevent those developments from hurting them.

Related: Worried about the Fiscal Cliff: Should I Sell?

If they see that inflation is ticking up or interest rates are starting to climb, they may shift money out of bonds and into gold or commodities. If they believe economic growth is weakening and the economy may be slipping into recession, they might get into defensive stocks or buy long-term bonds.

If you like making lots of moves with your investments, this is the right camp for you — for the reactive investor, investing is a never-ending guessing game. There will always be something going on in the economy or the markets that will catch your attention and require action.

The downside is that it’s tough — I would say virtually impossible — to make the right call consistently. Very often what seems like the obvious isn’t. Back in early 2009, for example, the last place most investors wanted to be was in stocks, which had just plummeted nearly 60% from their 2007 high. Moving to bonds or cash seemed a more prudent bet. Of course, we now know that since that low, stock prices have climbed more than 100%, while bonds gained about 28% and cash returned less than 1%.

A systematic investor, by contrast, starts with the premise that you can’t outguess the markets. The best you can do is set a strategy that will allow you to participate in the long-term upswing of stock prices, while hedging against the inevitable downturns by also holding some bonds and cash.

This type of investor doesn’t feel compelled to act every time a new piece of economic data flickers across his computer screen or a headline warns of impending doom.

Related: Retirement Savings: Quick Guide to How Much You’ll Need

Rather, the systematic investor realizes that one decision is key: determining the mix of stocks, bonds and cash that will give him a shot at reasonable returns while holding the risk of short-term setbacks to an acceptable level. Once he sets that mix, the systematic investor pretty much leaves it alone, except to rebalance periodically to bring the mix back to its original proportions.

If you prefer to be a reactive investor, I can’t offer you much advice. I don’t believe investors can consistently make the right moves in order to take advantage of market fluctuations. I think they’re more likely to end up hurting themselves.

No worries, though. There are plenty of brokers and other advisers out there all too willing to cater to the reactive investor’s need to act. In fact, the standard pitch from most of Wall Street and much of the financial services industry is that they know what moves to make, and for a price they’re willing to help you make the unending series of decisions you’ll face as a reactive investor.

If you want to join the systematic camp, however, then I suggest you stop obsessing about uncertainty and instead focus on creating a portfolio that makes sense for the long haul, in your case for someone with thirty or so years until retirement.

Related: Why There’s No Such Thing as Risk-Free Investing

Typically, retirement investors with that sort of time horizon invest between 70% and 90% of their savings in stocks with the rest in bonds, although the blend you choose should reflect how much you’re willing to see your account balance dip during market downturns. (To get a feel for the tradeoff between risk and return for different stocks-bonds mixes, you can check out Morningstar’s Asset Allocator tool.)

Of course, just because you arrive at the right mix doesn’t mean uncertainty will go away. It will always be there. But if you take the systematic approach, then at least you won’t have to react to it day after day after day.

MONEY

Protect Your Retirement from Inflation

How can I protect myself against inflation in retirement? — Roger Grebel, Candler, N.C.

In a recent survey by the Society of Actuaries, retirees named inflation the No. 1 retirement risk. Even though prices have been tame lately, that anxiety is understandable. Inflation of just 2% a year can reduce your purchasing power by roughly a third over 20 years.

While shielding yourself from rising prices is certainly crucial, don’t overdo it. After all, Social Security payments are pegged to the Consumer Price Index. And when you tilt your investment strategy too far toward protecting from inflation and price spikes don’t materialize, you can face subpar returns.

To hedge against the inexorable rise in prices over the years, keep a portion of your savings in investments that can generate inflation-beating returns. Stocks fit the bill; REITs and other real estate–related investments do too.

Related: What are the advantages of stocks for retirement?

You also need to guard against inflation that can erupt with little warning, like the oil-price shocks of the 1970s and ’80s.

To deal with this threat, many advisers tout commodities or gold. “But you’re talking about a general tendency for a payoff here,” says Vanguard Investment Counseling and Research principal John Ameriks. “It’s not insurance.”

Vanguard’s research shows that there’s roughly a one-in-three chance that commodities will post negative returns if inflation goes up.

Instead, go with Treasury Inflation-Protected Securities (TIPS), whose principal value rises along with inflation. TIPS are expensive today because of high investor demand.

Related: Retirement Savings: Quick Guide to How Much You’ll Need

So keep TIPS to 25% to 30% of your overall bond stake, with the rest in government and corporate bonds. The TIPS are more likely to fare well if prices spike, while the regular bonds will do better if inflation remains tame.

MONEY Health Care

4 Medicare Enrollment Mistakes to Avoid

Enrolling in Medicare? Don't get tangled up up in mistakes that are easily avoided. Photo: Massimo Gammacurta

Signing up for the health program isn't as straightforward as you might think. These common missteps will cost you.

When Houston attorney Barbara Quackenbush retired at age 67, she decided to stay on her company health plan through COBRA rather than sign up for Medicare. But as her COBRA coverage neared expiration, she learned that this choice will saddle her with a Medicare penalty requiring her to pay 20% higher premiums.

Even scarier, she’ll be left without coverage for 10 months. When Quackenbush found out, she says, “I was so upset I nearly dropped the phone.”

Reaching the big six-five is your ticket to guaranteed, affordable insurance via the Medicare system—provided you comply with a byzantine set of rules.

Getting the sign-up process right can be tricky for anyone, but it’s become a major headache for the growing number of folks working past 65, say advocates, particularly now that Medicare enrollment no longer comes at the same time people start collecting full Social Security.

“There are pitfalls you must watch out for,” says David Lipschutz, a policy attorney at the Center for Medicare Advocacy. Here are four big ones to avoid.

Mistake no. 1: Not enrolling because you’re employed.

If you’re still working, and have coverage from your job, you don’t have to sign up at 65. Many workers, though, benefit from enrolling, especially when you consider that you can take parts A and B at different times.

Who should sign up?

Part A, which covers hospitals, is a no-brainer for most people. It’s usually free and may pick up costs your job does not.

If you work for a small company, your firm may require that you take Part B, which covers doctor visits, so that Medicare can start paying most of your expenses. Anyone with a high-deductible plan can also benefit from Part B, since it often picks up costs before you’ve met the deductible.

A caveat: If you have a health savings account, you must stop making deposits.

Who should hold off on Part B?

Workers at large companies. The plan costs at least $100 a month and often provides little benefit beyond what their job covers.

Mistake no. 2: Failing to sign up when you or your spouse retires.

You must enroll in Part B eight months from your last month of work, even if you have retiree benefits or COBRA. Miss that date and your coverage won’t kick in for three to 15 months. You’ll also face a 10% premium penalty for every 12 months you delay.

For Quackenbush, going on COBRA for 18 months without enrolling in Part B triggered a penalty and waiting period.

If you’re 65 or older and get benefits from your spouse’s job, remember that the same rules apply when she retires, says Frederic Riccardi of the Medicare Rights Center: You must sign up within eight months of her final month.

Mistake no. 3: Accidentally voiding retiree coverage.

Signing up for an Advantage plan, which offers coverage as an alternative to parts A and B, could prompt your former employer to kick you off its insurance.

Going with a private Part D plan, which covers drugs, may have the same effect. The reason, says John Grosso, a consultant at Aon Hewitt, is that most retiree coverage is designed to work with traditional Medicare and isn’t compatible with private plans.

Mistake no. 4: Not considering Medigap early on.

The first six months after you enroll in Part B is usually the cheapest time to buy a Medigap plan, which covers deductibles and other costs not picked up by Medicare.

People still covered by their job may not need Medigap right away, but if you buy after this six-month period, your monthly premium could jump by $50 or more, especially if you have a health problem. Worse, you could end up being denied.

 

For more information about the Medicare program, see the Ultimate Guide to Retirement.

 

MONEY Ask the Expert

Why an Immediate Annuity Might Be Right for You

Q. I’m 65, my wife is 63 and we have about $600,000 saved. She thinks we ought to consider buying an annuity. I feel we don’t need an insurance company to give us a monthly payout when we can do it ourselves. What do you think? — R.B., Philadelphia, Pa.

A. I think the fact that your wife believes an annuity is worthy of consideration means the two of you should at least have a serious talk about an annuity’s pros and cons.

To make the discussion more worthwhile, you both should acquire a solid understanding of how annuities work — and what you get and what you give up when you buy one. You can get the lowdown on all that and more by checking out the Annuities section of our Ultimate Guide to Retirement.

As you probably know, annuities come in a dizzying array of types and styles.

But if you’re looking for a steady payout you can count on throughout retirement, I think the version you ought to focus on is a plain-vanilla immediate annuity.

This is the kind that’s been around for hundreds of years and that often pops up in classic English literature. (Believe it or not, there’s actually a research paper titled “Actuarial Issues in the Novels of Jane Austen” that examines the assumptions characters make about life expectancies and payouts.)

What I like about immediate annuities is that they’re simple, least as far as annuities are concerned: You give an insurer a lump sum and in return the insurer guarantees you a fixed monthly payout for life.

Related: Seniors: Beware the sales pitch

The payment you receive depends on the current level of interest rates (higher rates translate to a higher payment) and the age when you begin receiving payments (the older you are, the more you get). If you want your spouse to continue to receive the payments after you die (or for them to go to you if your spouse dies first), you would buy an immediate annuity with a joint-and-survivor option.

Today, a 65-year-old man investing $100,000 in an immediate annuity with lifetime payments would receive about $554 a month. A 63-year-old woman would get less than a 65-year-old man, about $503 a month, both because she’s younger and because women have longer life expectancies.

A 65-year-old man and a 63-year-old woman investing $100,000 who want payments to continue as long as one of them is alive would receive $455. That’s less than either would get on their own because the chances that at least one of them will be around at some point in the future are greater than their chances individually. (You can get annuity quotes for different ages and investment amounts at immediateannuities.com.)

You contend that you don’t need an annuity to create a payout on your own. That’s true. But you can’t be sure those payments will last for life as poor investment returns could deplete your assets. Nor can you create as large a monthly payment from the same amount of assets as an annuity can, unless you’re willing to take on more investment risk. That’s because annuity payments include not just an investment return but another component referred to as a “mortality credit.”

When you buy an annuity you are pooling money with a bunch of other investors, some of whom will die sooner than others. The insurer essentially shifts money that would have gone to the people who die early to those who are still alive. These little transfers — the mortality credits — are an extra that only an annuity can provide.

Of course, if you and/or your wife die early, your money will be fattening the payments of other investors who bought the annuity. At first glance, many people think this is bad deal. They feel they’ve thrown money away if they die before they can collect more in monthly payments than they’ve put into the annuity.

But even if you die unexpectedly soon after buying one, you haven’t thrown your money away any more than someone who bought car insurance but never ended up in a horrific accident did. With an annuity, you’re buying insurance against the possibility of living so long that you outlive your assets.

Related: The case for investing in bonds, too

This insurance isn’t free. Once you buy an immediate annuity that makes lifetime payments, you no longer have access to the funds you’ve invested. (If people could tap that money, everyone would withdraw it once they got sick or needed extra cash, and there wouldn’t be enough left to make the payments to the other annuity owners.)

So even if an annuity’s benefits seem particularly attractive, you wouldn’t want to put all of your assets into one. You’d want to make sure you have enough money in investments outside the annuity to fund emergencies and to give you a buffer against future inflation. (Read more on how to combine an annuity with traditional investments like stocks and bonds.)

However much you may decide to commit to an annuity, you’ll want to assure that you can count on collecting those payments as long as you’re alive.

To do that, stick to annuities backed by insurance companies with high financial strength ratings from companies like A.M. Best and Standard & Poor’s and limit the amount you invest in any single annuity to the maximum coverage provided by your state’s insurance guaranty fund.

Unfortunately, as interest rates have declined in recent years, annuity payments have also come down. But I don’t think that’s a reason to postpone buying an annuity if you really need the income now. On the other hand, if you don’t require immediate income or you’re unsure about investing in an annuity, today’s depressed interest rates are all the more reason not to rush into one.

If you decide to go ahead, you may want to spread out your investment among two or more separate annuities over the course of a couple of years. This way you hedge against the risk of investing all your dough when rates are especially low.

It may very well turn out that an annuity isn’t right for you and your wife. Perhaps the guaranteed income you’ll get from Social Security, plus judicious withdrawals from your $600,000 nest egg will see you through retirement just fine. But if for no other reason than insuring domestic tranquility, I think you and your wife should at least explore the option.

MONEY Ask the Expert

The Case for Investing in Bonds, Too

Q. I’m 52 and have had 100% of my savings in stocks since I began investing at age 25. Given my high risk tolerance and the fact that I expect that my pension and Social Security to cover a substantial portion of my expenses in retirement, why should I reduce my investment returns by investing in bonds? — Eric C.

A. If you’ve been putting your dough exclusively in stocks for the past 27 years, then you know firsthand how lucrative they can be over the long term. Since 1985, the year you began investing, stocks have gained an annualized 11%.

You no doubt also know how risky stocks can be over shorter periods. You’ve lived through the Crash of 1987 when the Dow Jones Industrial Average plummeted 508 points — nearly 23% — in a single day. And you’ve survived both the bear market of 2000-2002, which saw stock prices fall 49%, and the meltdown of 2007-2009, when stock values dropped almost 57% (a setback from which they still haven’t fully recovered).

I’m sure I also don’t have to tell you that bonds returned far less than stocks over the past 27 years and that their yields are especially low right now, with 10-year Treasury bonds yielding less than 2% and investment grade corporates paying only a half percentage point or so more.

Given your experience with stocks and the state of the bond market these days, I can understand why you equate keeping any of your savings in bonds as nothing more than an invitation to subpar returns.

But I think you need to revise your thinking. Here’s why:

You became an investor near the beginning of one of the greatest bull markets in history. The surge in stock prices that began in 1982 and with few interruptions continued through the end of 1999, showered investors with almost unprecedented rewards. It also included some truly phenomenal stretches, like the 10-year span from 1989 through 1998 when stocks gained a compounded 19% a year, almost double equities’ long-term annualized return since 1926. So I think it’s fair to say that this outsize performance has a lot to do with the way you feel about stocks.

Related: Investing: When to ‘Take Money off the Table’

What’s more, up to now you’ve viewed the risks and rewards of stock investing primarily through the lens of a relatively young person. Which means you’ve been much more likely to shrug off stocks’ periodic setbacks. They’re not as scary when you have decades to rebound from them.

But looking ahead, conditions may be quite different. While stocks are still likely to beat bonds over very long stretches, many analysts believe stocks won’t deliver anywhere near the same size gains they did in the go-go ’80s and ’90s, nor will they outperform bonds by as large a margin.

That’s certainly been true for the past 10 years with stocks gaining 7.3% vs. 6.3% for bonds. Some investment advisers, like PIMCO’s William Gross, are even forecasting extremely meager stock returns for the years ahead.

And while you may still think of yourself as quite the risk taker, I think you should allow for at least the possibility that a 50% decline in the value of your savings — and the retirement income it might produce — may be much more upsetting as you get closer to the end of your career than it was when you were starting out. I’m a bit older than you, but I’ve found I’m much more sensitive to stocks’ volatility myself.

As you weigh the issue of risk, you may also want to factor into your thinking recent research that suggests that the severity of downdrafts we’ve seen in stocks in the past may occur more frequently than we previously believed.

At any rate, I recommend that you at least consider scaling back your equity exposure. I’m not talking about a total retreat. Rather, I’m suggesting a stocks-bonds mix that allows for long-term growth, but won’t get hammered as much should the market tank during your home stretch to retirement — say, 70% stocks and 30% bonds. As you age, you would then gradually reduce your stock stake, dialing it back to 50% or so of your holdings by the time you retire and then eventually paring it down to between 20% and 30%.

If you expect that your pension and Social Security will cover most of your basic retirement living expenses, you’ll have more leeway in how much you’ll have to draw from your stock portfolio. That flexibility could allow you to be more aggressive and increase your stock percentage a bit. But I’d be wary of going higher than, say, 75% to 80% stocks today and 55% to 60% at retirement.

Related: Retirement Income: Five Steps to a Sound Plan

Many investors are particularly wary of making bonds part of their portfolio these days for fear they could suffer losses if interest rates rise. But the potential setbacks in bonds — especially those with short- to intermediate-term maturities — pale in comparison to the hits stocks have taken in the past and could take in the future. So despite any anxiety about interest rates rising, bonds are still a worthwhile way to reduce the overall risk level of a portfolio.

Bottom line: I’m all for maintaining reasonable exposure to stocks in the years leading up to and following retirement. But the key word is reasonable. Obviously, you have to decide what’s appropriate for you. But you’ll be a lot better off if your decision includes a realistic reassessment of your risk tolerance rather than simply going with what worked over the past 27 years.

MONEY Ask the Expert

Boost Retirement Income, Minimize the Risk

Q. An elderly widowed relative of mine barely scrapes by month-to-month with absolutely nothing left over. Aside from Social Security, she has a small savings account worth about $30,000 and a house that’s paid for and valued at $150,000. It just breaks my heart to see her pinch pennies. Is there anything she can do to increase her monthly income? — Pam, LaGrange, Ky.

A. Before I get to some suggestions, you and your relative need to understand that trying to squeeze more income from limited resources always comes with some risk, even if it’s not readily apparent.

For example, many retirees trying to get more than the ultra-low interest rates available on savings accounts and CDs these days are turning to long-term bonds, junk bonds or even mutual funds and ETFs that focus on dividend-paying stocks. By pursuing those loftier payouts, however, they are putting their principal at greater risk of losses.

So you want to be careful that your well meaning attempt to help your family member doesn’t end up jeopardizing the little financial security she has now.

With that in mind, there are ways your relative may be able get some additional income from her two major assets: her $30,000 savings account and the$150,000 she has in home equity.

Let’s start with the savings account. Given that your relative has no other investments or cash to fall back on for emergencies and unexpected expenses, her first concern should be keeping this thirty grand safe. That means keeping all or nearly all of it in FDIC-insured accounts. Unfortunately, that also means having to accept a low rate of return.

Related: Why do I need an emergency fund, and how much do I need?

Still,she may be able to do better than the average yield of 0.5% or so that banks pay on savings accounts. By comparing rates on sites like Bankrate.com and MoneyRates.com, she could get as much as 1% or so on FDIC-insured savings and bank money-market accounts (not to be confused with mutual fund money-market funds).

She can do a bit better — say, 1.25% or more — by putting a small portion of the thirty grand into a one- or two-year CD (although she should do that only with funds she won’t need over the next 12 to 24 months).

These moves aren’t going to shower her with tons of extra income. But earning 1% to 1.25% a year on $30,000 instead of 0.5% translates to an extra $150 to $225 a year, which may be enough to provide your relative with a bit of breathing room or, if nothing else, the occasional small splurge.

She can boost her spending cash even more by devoting a portion of her $30,000 to an immediate annuity, a type of investment that provides guaranteed payments for life.

The size of those payments depends on your age, interest rates, your gender (women get lower payments than men because they live longer on average) and the amount you invest. But today, a 75-year-old woman who buys a $10,000 immediate annuity would receive lifetime payments of about $70 a month, or $840 a year, well above what she can get by keeping the same sum in a savings account or CD.

There’s a downside to doing this, however. Once she puts her money into an immediate annuity, she no longer has access to that cash. She receives only the monthly payments. That’s why anyone considering an immediate annuity should be sure to leave plenty of assets outside the annuity for emergencies.

Your elderly relative has a chance to get a lot more extra cash, however, by tapping the $150,000 of equity in her home.

She can do that by taking out a reverse mortgage, which would give her either a lump sum, monthly payments or a line of credit or a combination of these options.

The amount of money you can get from a reverse mortgage varies based on where you live, the value of your home and your age. A 75-year-old with a home worth $150,000 that has no mortgages or liens might qualify for a reverse mortgage of up to $100,000 or so.

The upside: Your relative can get the cash now and won’t have to repay the loan until she dies or moves out the house. But there are also some drawbacks.

One is cost. Reverse mortgages come with some pretty substantial fees. Even though you don’t have to pay them upfront, they drive up the effective interest rate on the loan, especially if you die or move out of the home shortly after taking out the loan. A relatively new variation on the standard reverse mortgage comes with lower costs, but the tradeoff is that you get a smaller loan.

Reverse mortgage borrowers are also required to pay homeowners insurance premiums and property taxes and keep the house in good condition. If that would be a problem for your relative — or if she was hoping to leave the home as a legacy to any heirs — then a reverse mortgage probably isn’t a good choice.

Given the complexity of reverse mortgages and the potential for abuse by unscrupulous advisers who may recommend one of these loans even if you don’t need it, the government requires that would-be borrowers work with a counselor before taking out one of these loans. But however well intentioned that prerequisite may be, a recent report from the Consumer Financial Protection Bureau warns that the counseling isn’t always up to snuff.

Related: Find the Right Financial Planner

So if a relative is seriously considering a reverse mortgage, she ought to consider paying an independent financial adviser a flat fee or per hour charge to take a look at the terms (and also weigh in on any moves your relative plans to make with her $30,000 savings account) as an added precaution. To mitigate any conflict of interest on the adviser’s part, your relative should also make it clear that she won’t be buying any product or service from the adviser. She’s seeking advice only.

There are any number of moves your elderly relative can take to give her more financial wiggle room. The key, though, is to make these moves judiciously and cautiously, so she doesn’t end up having to pinch her pennies even tighter down the road.

MONEY

Work until We’re 70? You Cannot Be Serious.

The problem is a common one in the arena of personal finance: You’re approaching the age at which you’ve planned to retire, but you don’t have enough money saved. What do you do?

The solution is a common one, too: Work longer. You’ll hear it from financial planners — and from Washington as well. A White House commission investigating ways to keep Social Security from running out of money is considering raising the age when full retirement benefits kick in; currently 66, the full retirement age is slated to rise to 67 by 2027. Moving the retirement age up to 70 is in the realm of possibility.

But the “work longer” solution sounds awfully blithe to many Americans, because it assumes that you can work longer. And let’s face it: For many people — from a celebrity superathlete such as Michael Jordan to any working stiff — that’s just not realistic.

As John Leland points out in The New York Times today, if you have a job that requires physical activity more strenuous than sitting at a computer, your ability to do that job can be drastically different at age 69 than it is when you’re 62. According to the Center for Economic and Policy Research, about 45% of workers age 58 and older are employed in physically demanding jobs or jobs with difficult working conditions. That’s more than 8.5 million people.

Even if you’re a desk jockey, you can’t always work into your 60s or 70s. Sure, there are age discrimination laws on the books. But ask any fiftysomething who works in an industry where staying on top of trends is key — fashion, advertising and music, for example — and you’ll hear how hard it is to get and keep a good job in that field after you hit a certain age.

What about training for a new job? Well, sure. But such training costs money, and with unemployment still well above 9%, a job at the end — especially a job that pays what you once made — isn’t a sure thing.

But enough with the depressing news. Instead of wringing our hands, we should be saying to ourselves, “OK, this is the reality these days. What’s the best way to manage it?”

For starters, I’d propose that people tailor their retirement planning not to their age — the default way of doing it — but to the number of years they’re likely to make good money in their chosen field. More and more, people in certain industries need to think a little more like professional athletes. They make their money early and — if they’re smart — save as much of it as they can. That way, when their careers end, they can take a job that pays less or do consulting work part time. Or even, just maybe, retire early.

Are you changing your own retirement planning to deal with the new realities? Please share by posting to comments.

Find MONEY on Facebook: facebook.com/MoneyMagazine.

MONEY

Your Midyear Tax Checkup, Day 4: Revisit Retirement Contributions

With 2010 halfway complete, we’ve spent all this week providing you with tax planning tips to keep in mind for the six months ahead — the kind of advice CPAs across the country are considering for their own clients right now. These moves require some foresight and time, which is why it’s important to start thinking about them now (vs. on December 31). But they’re worth the effort in terms of savings and/or stress reduction.

We’ve discussed how to do an estimated tax analysis, which write-offs you should be thinking about, and how to make use of investment losses.

One thing we haven’t yet talked about is the good ole’ nest egg.

Rob Seltzer, a Beverly Hills, Calif. CPA and financial adviser, notes that midyear is a good time to reconsider how much you’re contributing to your retirement accounts — and not just because saving for retirement is good for your future, but also because it’s good for your present tax situation.

By setting aside money in a 401(k), you’re deferring the income, which means it is not considered taxable for the current year. And reducing your taxable income reduces the amount you’ll have to pay tax on. If you’re eligible to deduct contributions to a traditional IRA — for couples filing jointly who are covered by a retirement plan at work, this starts phasing out starting at incomes of $89,000 — saving in that vehicle is another way to take an edge off today’s income.

Bottom line: If you’re not currently maxing out these accounts, consider upping your contributions. For 2010, you can stash up to $16,500 in a 401(k), plus another $5,000 $5,500 if you’re 50 or older. You can put away up to $5,000 in an IRA, or $6,000 if you’re 50 or above. For a married couple in California with an income of $100,000, increasing 401(k) contributions from $10,000 a year to $15,000 shaves $1,500 off their tax bill, says Seltzer. It may take 15 minutes on the phone with HR to arrange an increase, but that’s a pretty sweet return on investment.

Anyway, that’s it for what the pros say you should be thinking about right now regarding taxes; but if there’s something specific on your mind that we haven’t discussed this week, go ahead and ask it in the comments, and we will try to put it to our experts. Now we return you to your regularly scheduled summer vacation…

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